In a much-awaited Supreme Court of Canada decision, a company’s mandatory arbitration clause was deemed unconscionable and invalid. This decision will have far-reaching implications for businesses that include arbitration clauses in their contracts.

Worker Challenges Mandatory Arbitration Clause

A worker provided food delivery services in Toronto using Uber’s software applications. To become a driver for Uber, he was required to accept the terms of Uber’s standard form services agreement. Under the terms of the agreement, the worker was required to resolve any dispute with Uber through mediation and arbitration in the Netherlands. The mediation and arbitration process required up-front administrative and filing fees of US$14,500, plus legal fees and other costs of participation. The fees represented the majority of the worker’s annual income.

As a result, in 2017, the worker began a class proceeding against Uber in Ontario for violations of employment standards legislation. Uber brought a motion to stay the class proceeding in favour of arbitration in the Netherlands, relying on the arbitration clause in its services agreement with the worker.

In response, the worker argued that the arbitration clause was unconscionable and therefore invalid.

The motion judge stayed the proceeding, holding that the arbitration agreement’s validity had to be referred to arbitration in the Netherlands, in accordance with the principle that arbitrators are competent to determine their own jurisdiction.

The Court of Appeal allowed the worker’s appeal and set aside the motion judge’s order. It concluded that the worker’s objections to the arbitration clause did not need to be referred to an arbitrator and could be dealt with by a court in Ontario. It also found the arbitration clause to be unconscionable, based on the inequality of bargaining power between the parties and the improvident cost of arbitration.

Supreme Court of Canada Finds Arbitration Clause Invalid

The Supreme Court of Canada began by explaining that the worker’s claim that the arbitration clause was unconscionable required considering two elements: first, whether there was an inequality of bargaining power and, second, whether there was a resulting improvident bargain. Unconscionability is an equitable doctrine that is used to set aside unfair agreements that result from an inequality of bargaining power.

On the first question, the court found that there was inequality of bargaining power between Uber and the worker because the arbitration clause was part of an unnegotiated standard form contract, there was a significant gulf in sophistication between the parties, and a person in the worker’s position could not be expected to appreciate the financial and legal implications of the arbitration clause.

On the second question, the court found that the arbitration clause was improvident because the arbitration process required US$14,500 in up-front administrative fees.

As a result, the court concluded that the arbitration clause was unconscionable and therefore invalid, stating:

“There was clearly inequality of bargaining power between Uber and [the worker]. The arbitration agreement was part of a standard form contract. [The worker] was powerless to negotiate any of its terms. His only contractual option was to accept or reject it. There was a significant gulf in sophistication between [the worker], a food deliveryman in Toronto, and Uber, a large multinational corporation. The arbitration agreement, moreover, contains no information about the costs of mediation and arbitration in the Netherlands. A person in [the worker]’s position could not be expected to appreciate the financial and legal implications of agreeing to arbitrate under ICC Rules or under Dutch law. Even assuming that [the worker] was the rare fellow who would have read through the contract in its entirety before signing it, he would have had no reason to suspect that behind an innocuous reference to mandatory mediation “under the International Chamber of Commerce Mediation Rules” that could be followed by “arbitration under the Rules of Arbitration of the International Chamber of Commerce”, there lay a US$14,500 hurdle to relief. Exacerbating this situation is that these Rules were not attached to the contract, and so [the worker] would have had to search them out himself.

The improvidence of the arbitration clause is also clear. The mediation and arbitration processes require US$14,500 in up-front administrative fees. This amount is close to [the worker]’s annual income and does not include the potential costs of travel, accommodation, legal representation or lost wages. The costs are disproportionate to the size of an arbitration award that could reasonably have been foreseen when the contract was entered into. The arbitration agreement also designates the law of the Netherlands as the governing law and Amsterdam as the “place” of the arbitration. This gives [the worker] and other Uber drivers in Ontario the clear impression that they have little choice but to travel at their own expense to the Netherlands to individually pursue claims against Uber through mandatory mediation and arbitration in Uber’s home jurisdiction. Any representations to the arbitrator, including about the location of the hearing, can only be made after the fees have been paid.”

The appeal was dismissed.

What Does This Case Mean for Arbitration Clauses Going Forward?

Arbitration clauses are common in business contracts. However, this decision is an indicator that companies will need to carefully consider the terms of such clauses going forward. Particularly in cases where there is an unequal power dynamic between the parties, or where the clause would impose undue cost or inconvenience on a party, the clause may be deemed unconscionable. When crafting a contract containing an arbitration clause, it is important to consult with a skilled business and litigation lawyer to ensure the contract will stand up to judicial scrutiny if challenged.

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